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Tackling the Health Care Tapeworm

Tackling the Health Care Tapeworm

Three giants in their industries will form a new company to tackle the health care “tapeworm.” There will be changes in the health care sector. Unfortunately, there are no details yet as to what those changes will be.

Amazon, Warren Buffett and JPMorgan are forming a new company to address the health care costs of their employees, sending shares of health care companies down sharply across the entire sector despite the vague nature of the announcement.

On Tuesday Amazon’s Jeff Bezos said that he, along with Buffet and JPMorgan, would attempt to make health care better for hundreds of thousands of their employees, and perhaps, eventually, the country.

There were few details and those involved said the project is in the early planning stage.

“The ballooning costs of (health care) act as a hungry tapeworm on the American economy,” said Buffett, the head of Berkshire Hathaway, in a prepared statement. “Our group does not come to this problem with answers. But we also do not accept it as inevitable.”

The new company will be independent and “free from profit-making incentives and constraints.” The businesses said the new venture’s initial focus would be on technology that provides “simplified, high-quality and transparent” care.

JPMorgan Chairman and CEO Jaimie Dimon said, “our goal is to create solutions that benefit our U.S. employees, their families and, potentially, all Americans.”

In early trading, “The potential disruption from three renowned innovators in technology and finance sent a shock wave through the health care sector, erasing billions in market capitalization in seconds.

Six of the top ten companies with significant share declines on the Standard & Poor’s 500 index were health care companies. Almost all companies in the health field were in retreat after the news.

But, One Company Was Rising

HCA HealtHCAre Inc (NYSE: HCA) was moving higher. HCA is the largest U.S. for profit hospital operator. The company’s earnings report showed solid gains.

HCA announced that its quarterly revenue rose 8.7% as more patients were admitted to its hospitals. Hospital operators have been reporting low patient admissions in the past few quarters, but HCA has been buying hospitals from rivals in the face of the decline in volumes.

The company, which operates 179 hospitals and 120 freestanding surgery centers, said its revenue rose to $11.56 billion from $10.64 billion. HCA’s same-facility equivalent admissions, which include patients who stay in the hospital overnight and those who are treated on an outpatient basis, rose 2.3% in the fourth quarter.

Net income attributable to HCA plunged 48.5% to $474 million, or $1.30 per share, because the company reported a $301 million accounting charge related to the recently passed U.S. tax reform.

It’s possible the reason for the stock’s move higher was the fact that the company also said it was initiating a quarterly dividend of $0.35 per share.

The Stock’s Trend Supports More Gains

HCA’s price gains confirm a breakout that can be seen on the long term price charts. The weekly chart shows the breakout from a trading range.

HCA

The monthly chart shows that trading range was in fact a potential consolidation of post-IPO gains.

HCA

The stock, based on the chart patterns, is now well positioned to move at least 10% higher over the next several weeks.

Trading the Trend

When a stock is expected to move higher, traders could consider obtaining long exposure to the stock to profit. A number of options trading strategies could be used to meet this objective.

Among those strategies is a bull put spread that could be used. The risk and reward diagram is shown below and it offers limited risk with limited potential gains. However, it is well suited for a stock which is in an up trend.

bull put spread

Source: The Options Industry Council

This strategy involves two put options. One put option is bought and a second put option with the same expiration date but with a lower exercise price is sold. Selling the put option will generate immediate income, just like the more familiar covered call strategy would. But, unlike a covered call, risk is limited.

Many traders will be familiar with the idea of a covered call. This is a conservative strategy many long term investors use to generate income in stocks they own that are unlikely to make large moves.

Although the bull put spread is different than a covered call, the bull put spread strategy meets the same objective as the covered call which is to generate some income. This trade generates immediate income and carries limited risk.

A Specific Trade for HCA

For WHR, a bull put spread could be opened with the February 16 put options. This trade can be opened by selling the February 16 $97.50 put option for about $0.75 and buying the February 16 $95 put for about $0.35.

This trade would result in a credit of $0.40, or $40 per contract since each contract covers 100 shares. That amount is also the maximum potential gain of the trade.

The maximum possible risk is the difference between the exercise prices of the two options less the premium received. For this trade, the difference between exercise prices is $2.50 ($97.50 – $95). This is multiplied by 100 since each contract covers 100 shares.

Subtracting the premium from that difference means, in dollar terms, the total risk on the trade is then $205 ($250 – $40).

The potential gain is about 19% of the amount of capital risked. This trade will be for about two weeks and the annualized rate of return provides a significant gain.

The bull put spread is an example of how options are a versatile tool and could meet many of your trading objectives. In this trade, options provide income and defined risk that could be lower than owning the stock. This strategy also has a high probability of success.

These are the type of strategies that are explained and used in stock trading tips Options Insider service. To learn more about how options can be used to meet your goals, click here for details on Options Insider.

 

 

 

 

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